Development Bank – A different vehicle for economic growth
Ghana’s quest for a national development finance institution to provide critical financing for economic development cannot be overemphasised.
This is because the existing commercial banks have over the years not been able to deliver and adequately supported the country’s development process, partly due to the maturity expectation gap.
“The maturity expectation of the depositor is short-term. Those borrowing have a short-term maturity expectation also. The banks can’t use depositors’ short-term funds to finance long-term projects,” Nana Otuo Acheampong, a Banking Consultant explains.
Overall, the development bank is expected to enhance access to long-term credit and loans for companies, support critical sectors such as manufacturing, agriculture and housing, which have attracted low investments over the years and also extend the loan period for meaningful development.
“We are aiming to establish the bank by the end of 2021 with an initial capitalisation of around $ 250 million from the government ($200 million paid as of May 2021), the Minister of Finance recently told members of the Association of Ghana Industries at a forum.
“The World Bank plans to support with $250 million, EIB plans Euros170 million, German Development Bank plans Euros 46.5 million (tier 2 capital), and technical assistance of Euros three million, while French plans AFD initial support through partnership on guarantees.”
The European Union, through its European Investment Bank in Belgium, has given 170 million Euros to Ghana and the DBG to help channel private investments into productive sectors, new technologies and help accelerate market efforts to achieve the sustainable development goals.
Access and cost of credit are the banes of many SMEs, seeking funds for projects, which are urgently
required to spur economic growth, deliver jobs and improve the quality of life of the people.
It is to address some of these difficulties faced by companies that the government is working to set up the Development Bank Ghana, an institution to reverse the trend of inadequate funding support by the commercial banks to the economy and to look for long-term finance to support borrowers with expectation for accelerated development in the medium term.
Nana Otuo Acheampong says it is surprising that discussion on the set up of the DBG was generating so much negative debate as Ghanaians confuse Development Bank operations with that of the Universal Banks.
First, the law regulating a development bank is different from that controlling a commercial bank. Commercial banks are regulated under the Banks and Specialized Deposit Taking Institutions Act, 2016, Act 930. On the other hand, the development bank is regulated by a new Act, which is known by very few people. It was promulgated in October 2020.
The Development Finance Institutions Act 2020, Act 1032 was passed by the Ghanaian Parliament and received Presidential assent on 27th October 2020.
The Act establishes a framework for the licensing, regulation, and supervision of Development Finance Institutions (DFIs) within the country.
Development Finance business is defined in the Act to mean the “provision of short-, medium- and long-term funding, guarantees and other credit enhancement structures to key sectors of the economy in a financially sustainable manner.”
Both laws are under the purview of the Bank of Ghana, which regulates both banks and SDIs and also the development institutions.
Furthermore, commercial banks engage in deposit-taking business, taking deposits from the public and giving out loans to them. To qualify as a bank under Act 930 you have to do these dual activities.
Before Act 930 there was Act 774, which regulates non-bank financial institutions and but it is basically one-sided banking.
“Such banks give out loans but don’t take deposits from the public. With the development finance, it is similar to Act 774. They give out loans but don’t take deposits from the public,” he states.
Act 1032 spells out four classes of licences issued by the regulator – class one to four. Class one will be wholesale, class two retail, class three offer guarantees and class four will combine any of the three.
“I believe it’s the fourth class that can aid one to access long-term finance,” he notes.
The Act is a recognition by the government to enhance economic development through broad-based private investments into productive sectors, to create jobs and improved livelihoods and help accelerate market efforts to achieve the sustainable development goals.
Currently, there are 66 Development Institutions in the world such as Business Development Bank of Canada, British Business Bank, Development Bank of the Philippines and Rwanda Development Bank.
“The general expression is economic development. My first priority for economic development will be on innovation and technology. Everything now is digital, including banking. But 90-95 % of our banking apps are all imported leaving our own science and technology students unemployed.”
“We have many Science and Technology universities and we still import products of technology. We need to finance them to be able to develop programmes. Agriculture is also a place to put emphasis.”
Nana Otuo Acheampong says by prioritising farming, production and technology, the transformation will come from getting access to long-term finance and then the economy being able to do the things it aspires to do.
“Going back to all the priorities, technology is core to almost all activities now. If we can transform with technology, we can increase in producing innovative products. With farming, we can mechanise it, we can increase yield in that sector too. Through digitization, people can access products and services of the bank.”
However, satellite offices would be opened in the various regions to aid in making enquiries.
The Finance Ministry says the benefits to the economy will be enormous, including job creation as existing companies expand their product lines and new industries spring up.
Promotion of value-addition to agricultural products for export and a reduction in the housing deficit through support for the real estate sector are other benefits.
“DBG is a key pillar in our efforts to quickly recover from the effects of the COVID-19 pandemic and quickly resume our economic transformation path as articulated in the Ghana CARES/Obaatampa Programme,” it emphasises.
“It is intended to be a model institution that supports the financial system to play its role in supporting the private sector to expand and create jobs.”
It would help address two important constraints in our financial system – the lack of long-term funding, and the lack of adequate funding to the productive sectors of the economy.
Currently less than 15% of loans given out by banks are for five years or longer, making investment in long gestation project very difficult for the private sector.
Agriculture and manufacturing sector receive around four per cent and eight per cent respectively, of banks loans compared to their shares in GDP and employment and potential for driving economic transformation, the Ministry notes.
Therefore, the pprimary focus areas of DBG will be:
* Agribusiness, with a focus on off-farm value-chain activities
* ICT, software, and allied services, including Business-Process Outsourcing, and Tourism
* Boosting homeownership through affordable and longer tenure Mortgage Finance
DBG is not similar to the existing commercial banks in the country. It is a non-deposit taking wwholesale bank.
It will neither give retail nor direct business loans, like the former Bank for Housing and Construction, NIB, ADB, and the like.
It will rather provide funds to the existing commercial banks and other qualifying financial institutions to provide long-term lending and other innovative products that are presently lacking in the system.
The bank will therefore complement and strengthen the operations of existing financial institutions.
The Government, therefore, expects the DBG to be a financially sustainable institution that is able to raise long term funds from the domestic and international capital markets and from international financial institutions, based on its own balance sheet.
Work on the DBG started in 2018 with a Task Force of industry experts established by Government to recommend the best approach to establish a modern and dynamic development bank. Based on the recommendation of the Task Force, Government decided to set up DBG as a new non-deposit-taking-wholesale-
bank under the Companies Act.
“The advantage we foresee of a greenfield approach is that one gets to start from a clean slate, with no legacy financial, governance and other issues,” the Finance Minister emphasises.
“This allows us to focus on the future and move straight into setting up DBG equipped with modern and sound design principles.”